World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

The degree of intermediation by the Federal Reserve in the issuance of US Treasuries hit a record in Q2, accounting for just under 50% of all net UST issuance absorption. This is a startling number, as the Fed's $164 billion in Q2 Treasury purchases dwarfs the combined foreign/household UST purchases of $101 billion and $29 billion, respectively, over the same time period. In fact, the Fed was a greater factor in UST demand than all three traditional players combined: Foreigners, Households and Primary Dealers, which amounted to a $158 billion in net Q2 purchases.

This dramatic imbalance puts a lot of question marks over how the upcoming hundreds of billions in incremental Treasury purchases will be soaked up, now that QE only has $15 billion of capacity for USTs: with Households lapping up risky assets it is unlikely they will look at Treasuries absent some dramatic downward move in equities, while Foreign purchasers, which many speculate are in a game of Mutual Assured Destruction regarding UST purchases, have in fact been aggressively lowering their purchases of Treasuries (from $159 billion in Q1 to $101 billion in Q2, an almost 40% decline in appetite!). Will the US make these purchases much more attractive come October when QE for USTs ends? And if so, what kind of rates are we talking about? One thing is certain: in terms of priorities of the Federal Reserve, keeping the equity market buoyant, is a distant second to ensuring successful auction after auction well into 2010. After all there is near $9 trillion in budget deficits that need financing over the next 10 years.

From Morgan Stanley:

Flow of funds: The Fed also released its flow of funds data for Q2 on September 17. The main points are that:

From Kenneth Harney at the LA Times: Homeowners who 'strategically default' on loans a growing problem

National credit bureau Experian teamed with consulting company Oliver Wyman to identify the characteristics and debt management behavior of the growing numbers of homeowners who bail out of their mortgages with none of the expected warning signs, such as nonpayments on other debts.

...

[Some results:]

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The number of strategic defaults is far beyond most industry estimates -- 588,000 nationwide during 2008, more than double the total in 2007. ...

So real estate makes up nearly 40 percent of household net worth. Keep in mind that $20 trillion in real estate is secured by $10.4 trillion in mortgages many that are now going bad. Interestingly enough, if you look at the mortgage data it peaks around $10.54 trillion and has fallen to $10.4 trillion. Do we really think that only a few hundred billion in mortgages have gone bad? This is simply a reflection of banks not writing down option ARMs and other questionable assets.

The commercial real estate debt is going to hit and cause more losses in the years to come. Yet this is part of the trend that we will not be seeing in the Q3 report. And if you really want to see something frightening in the report, just look at total debt outstanding:

Ben's magic printing-press – which supposedly can print up infinite amounts of new “money” without diluting all the trillions of existing U.S. dollars (i.e. without inflation).

The fact is that there will never be any more foreign demand for U.S. debt, unless/until U.S. interest rates rise high enough to compensate foreign investors for the high risk of default and the enormous inflationary pressures building up in the U.S. economy, as a result of the current reckless creation of new money and debt.

Just as U.S. perma-bulls have discovered the myth that foreign investors would “always” be willing to load up on more U.S. debt, these same deluded zealots are about to discover that there is nothing “magical” about Bernanke's printing press. The U.S. government may be able to grossly manipulate markets over a short-term basis, but it is utterly incapable of repealing the rules of arithmetic.

As any decent economic commentator can tell you, “inflation” is a monetary phenomenon.

To begin with, what most people don't know is that the vast majority of global silver production is in the form of byproducts of other mining operations – sometimes this silver occurs in primarily gold-based ores, but most of it is produced as a byproduct of base metals deposits. Thus, most silver production is of secondary importance to mining companies – making them very receptive to proposals from Silver Wheaton to pay them up front for the silver they will mine, but at a substantially discounted price.

A prime candidate could be China, which is sitting on the world's largest foreign exchange reserves, topping two trillion dollars, and has been seeking to diversify away from the dollar.

China in early September agreed to buy the first IMF bonds for about 50 billion dollars and has been on a gold-buying streak, increasing its gold reserves by 75 per cent from 2003 to 2008, according to official media.

The IMF said that if official demand is insufficient, it could conduct the gold sales "on-market in a phased manner over time," in line with an approach already followed by central banks.

The IMF would be constrained by the overall ceilings agreed by the central banks, which currently is 400 tonnes annually for the next five years, starting on September 27.

The IMF said it "will inform markets before any on-market sales commence" and "report regularly to the public on the progress with the gold sales."

In July, the IMF announced it would increase its lending to poor countries, mostly in Africa, to 17 billion dollars by 2014, including 8.0 billion over the next two years.

That compares with an annual average of one billion dollars in the 2006-2008 period to poor countries, and three billion dollars in the first half of 2009.

The IMF also had decided to cancel interest payments owed by poor countries through end-2011 and reform lending practices to make loans quickly available, at higher ceilings on amounts and with more flexible conditions.